It’s the Uber of Startup Litigation

Continue to follow our blog as we chronicle the newest litigation facing Uber.

Uber’s Latest Legal Battle

By now, you may have heard about the latest of Uber Technologies’ woes: a lawsuit, filed by one of their earliest venture capital investors, Benchmark Capital. Benchmark has alleged that Uber’s founder and now-former CEO, Travis Kalanick, engaged in fraud to induce Benchmark to sign documents that would entrench Kalanick into the company, even after his departure – Kalanick has experienced major fallout in the last year due to regulatory woes, scandals, and a potential trade secret investigation ongoing under his tenure. Ultimately, Benchmark wants the court to void a key amendment to the Company’s Voting Agreement, a result which would significantly lessen Kalanick’s control of Uber. This litigation highlights the fact that voting agreements are a critical spoke in the wheel of corporation operation. Startups of all sizes, pay attention: this is one instance in which you don’t want to be the “next Uber”.

The Importance of a Voting Agreement

Voting agreements are a part of any smoothly running board of directors. Essentially, all stockholders of a certain class, or enough voting power of the class needed to pass a resolution, agree to vote their shares in the same specific way. Voting agreements are often used to appoint representatives of major investors to the company’s board of directors, change the number of board seats, create a new class of equity, or other actions that are necessary to run the corporation.

Voting agreements are contracts, and like all other contracts, they can be challenged on grounds including fraud and/or misrepresentation. If a stockholder entitled to appoint a board member puts forth a board candidate based on misrepresentations of the individual’s experience or qualifications, the corporation and/or other stockholders may be able to challenge the agreement (depending on the level of discretion that the stockholder has in appointing the director). Of course, contract enforcement cuts both ways—if the corporation, or a corporate officer, misrepresents what is or is not happening at the corporate level in order to secure the execution of the agreement, the stockholders may attempt to challenge the agreement—which is what’s happening here with Uber.

The Challenge for Founders

Benchmark is also challenging Kalanick’s actions and role as CEO because of his efforts to structure Uber in such a way that he cannot practically be replaced. A lot of entrepreneurs, founders and start-up CEOs may see the business they helped start as “their” business—which makes sense, somewhat, since they provided some of the ideas to help create the business and ensure its growth. However, as the company grows, a founder has to necessarily some control and/or discretion in how the business is run. Laws governing business entities, corporations included, impose fiduciary duties on the company’s directors and corporate officers designed to protect the company its stockholders. Further, in taking on venture capital funding, a founder is forced to cede what was once total control of the business in exchange for their help in growing the company.

Ultimately, it’s important to search for a good balance of control between a company’s investor-appointed directors and founders, especially when it comes to legal issues like fiduciary duties and contracts, such as voting agreements. Both groups benefit when the company succeeds, and disputes like this one certainly don’t help.